UK-based Vodafone Group is reportedly considering buying Italian broadband operator Fastweb as part of its renewed emphasis on building a compelling converged fixed-mobile business in its core markets. The Italian business would add to Vodafone's existing fixed-line telephony and broadband business in Italy and enable it to replicate the success of incumbent Telecom Italia in offering premium product bundles, with all-important high-speed broadband access and internet video to consumers. Demand for these types of service packages has prompted Vodafone to pursue the acquisition of Kabel Deutschland in Germany and it seems likely that the operator will be considering similar strategic acquisitions in other European markets.
Across Europe, mobile subscriber acquisition rates have slowed or declined as saturation levels have been breached . At the same time, usage of core mobile voice services is trending downwards while messaging - though still very popular with consumers - is becoming harder to monetise while operators increasingly offer 'free' or unlimited SMS as part of deals designed to win back or retain customers. Amidst this background, a plethora of network-agnostic free messaging applications - such as WhatsApp - are entering mainstream use on smartphones, further constraining operators' ability to monetise basic data services.
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|Fastweb Financial KPIs, 2012/13|
Vodafone clearly believes that its long-term survival strategy hinges upon its ability to look beyond mobile as a standalone revenue-earner, although high demand for 'always-on, available-anywhere' services means that mobile will remain central to its business. It must therefore add on supplementary mass-market services, such as pay-TV and high-speed fixed broadband connectivity wherever possible. This has long been part of Vodafone's diversification strategy, but achievements have been mixed, to say the least.
Through the purchase of Tele2 's Italian business in 2007 , Vodafone currently operates Italy's thir d-largest retail fixed-line bu siness, with approximately 2.1mn subscribers as of March 2013, according to Italian regulator AGCOM. It account ed for 9.7% of Italy's total fixed-line market at that time, or 27.3 % of the market served by alternative operators. However , while its overall share of the market has not changed year on year, its share of the alternative market has fallen from 28.9%, as rival Fastweb has accelerated its expansion.
In the retail broadband market, Vodafone was serving 1.63mn broadband customers, utilising both its own fixed infrastructure and via local loops unbundled from other operators' networks. Its share of the broadband market stood at 11.9% in Q412, down from 12.5% a year earlier. Here also, it is losing market share to Fastweb.
BMI believes Vodafone's declining market share is behind its decision to target Fastweb. The company has made several attempts to acquire the company over the last couple of years. And, with parent Swisscom having already written-down the value of Fastweb early in 2012, as well as noting the heavy burden of financing Fastweb's next-generation network buildout commitments - it is developing its own fibre-optic backbone and is working with Telecom Italia to target key cities with fibre - it is possible that Swisscom may now be more amenable to selling the business.
Fastweb's revenues and profits are falling, despite strong customer additions over the last five quarters. This is due to increased price competition, a strategy that has served it well in achieving the growth momentum needed to justify its expansion, but is not sustainable in the long term. Fastweb has also begun offering mobile services as a reseller and reports good take-up of mobile services, as well as pay-TV packages offered in partnership with Sky Italia.
Fastweb would, therefore, appear to offer much that Vodafone can use to build a more compelling converged Italian business. With a book value of approximately EUR2.9bn (US$3.9bn), plus significant debt and an overstaffed management structure, acquiring Fastweb would not be without its challenges for Vodafone, which is suffering from significant profit erosion across Europe. However, utilising its recently-received dividend from its US partner, Verizon Communications, and possibly selling its stake in Verizon Wireless, the purchase of strategic growth assets such as Fastweb and Kabel Deutschland could yet put Vodafone back on the road to recovery or at least help it fend off the growing threat from alternative converged services providers and over-the-top (OTT) services such as WhatsApp and Netflix.